If you have the right genetics, grid pricing can offer significant economic benefits.
Value-based marketing, says Ted Schroeder, is the trend of the future. "Those who can adapt to this change will have profit opportunities. Those who can't won't have the opportunity to adjust," says the Kansas State University (KSU) economist.
Schroeder describes value-based marketing as moving away from selling a group of cattle at an average price to marketing cattle individually according to carcass quality. But what determines how much your calves are worth?
* How efficiently they grow and finish in the feedlot.
"Even if you know your calves have the genetics to gain 3.8 lbs./day, you won't get paid for that performance unless you convey that to the buyer," Schroeder warns. "You'll likely get paid based on how average cattle of your type perform in the feedlot."
* The value of your calves as finished cattle when they go to the packer.
"This is a major determinant of worth today," says Schroeder. "Today's basic cash market system doesn't adequately discriminate between high- and low-value cattle. Lack of information prevents this. The buyer won't pay premiums unless he knows your cattle are actually worth that much more.
"Suppose today's fed-cattle market is $65/cwt. but your calves have the traits to bring $67, or a $2 premium," Schroeder adds. "You know you've developed genetics over time, but if you sell them on a cash market you'll probably get $65. The live market doesn't value those traits fully because the buyer doesn't know their true value."
Why does it matter if those finished steers or heifers are worth $2/cwt. more?
"Because that $25/head is roughly the amount more they are worth as yearlings or calves," says Schroeder. "The critical thing is that you must know that because there's another side to the equation. If you find your calves are worth $2/cwt. less, that's $25/head less."
Carcass Data A Must To improve the value of your calves, you need information on carcass and feedlot performance, Schroeder says. A producer must also have reliability and integrity in this information and convey that to the buyer. This can be done through certification, alliances, retained ownership or reputation building.
"I don't know which is most effective, but I do know retained ownership gives you the most opportunity," Schroeder declares.
One of the tools coming on stream is a grid pricing system that determines the value of an animal based on its individual carcass traits. That's one reason Iowa cow-calf producer and feeder Bill Pellett joined the Precision Beef Alliance (PBA). It helps him meet the several grid programs available through packers.
He and his son Bret have 130 commercial cows and an 800-head open and confined feedlot near Atlantic. Calves are born in early March, weaned in September at 550 lbs., then go into the feedlot on a backgrounding ration and grass hay before being finished on a high-energy feed to slaughter at 12-13 months of age. Rations include earlage, high-moisture and dry cracked corn, wet distillers' grains with solubles and vitamin E. Vitamin E is one of Precision Beef's branded beef requirements.
Pellett's program is flexible enough to fit several packer grids available through PBA as the market calls for them.
"Know where your cattle fit in," Pellett says. "Decide economic incentives you want to establish in your herd, like ways to reduce feed or wintering costs of cows, or aim toward producing higher value-based products."
Pellett uses several information services to help him compare his production costs with other producers, not just in the Midwest but across the nation. That's also true with producers that supply Pellett with feedlot cattle.
Compare Different Grids "A lot of the pens can be divided into different programs so they hit two or three specific grids, based on visual inspection," says Pellett. "It's not a perfect system, but by looking at several different grids, you can pinpoint your cattle to fit each."
Grids have a base price with premiums paid for those above and discounts for those below (Table 1). If your cattle fit a grid, without outliers, you're home free.
"The caution I make is this: What happens if you have cattle that don't fit a grid," Kansas State's Schroeder says. "Most grids discount YG 4 and 5 and Standards substantially. You'd be surprised how much variability there is in a pen of cattle that looks uniform."
While Schroeder believes grid pricing is the way of the future, he warns there are no easy answers in this area.
"Packers consider different attributes differently," he says. "You have to know how your cattle fit that grid and how they perform under it. This means collecting and keeping historical carcass data on your calves. Then, simulate how your cattle would have done had they been sold on a grid."
Sorting Is Important With grids, you have to do a good job of handling and sorting outlier or poorer cattle to avoid significant discounts. "It takes every animal within a lot to ultimately come up with a premium price for the whole lot," Schroeder says. "You won't get these premiums on a live basis, or by selling on a cash market. To get those premiums you must have information and take a few risks."
To prove his point, Schroeder simulated returns on 202 pens of mostly English crossbreds from individual producers. Several pens were in alliances. He obtained premiums and discounts on four individual packer grids during the week of July 8, 1997. The packers provided him with specific quotes for Wednesday, Nov. 6, 1997. From this data he simulated prices on each pen based on live cash, carcass-dressed and four packer grids. The figures were revealing.
If all 202 pens were sold live, the average return was $842/head (Table 2); dressed, $862/head, Schroeder calculated.
"Grid returns were lower, some a lot lower," he notes. "If I had sold them all in one method and gotten the average price, I would have been better off going dressed with these particular pens of cattle."
Schroeder believes that if he knew everything about these cattle - quality grade, yield grade and dressing percent - he could have targeted those cattle to a particular selling method to get the highest revenue. Here's what he found:
* Only five, or less than 3%, of the 202 pens, brought higher returns when sold live in this simulated comparison. "It wasn't quality grades that threw them out, but lower dressing percent," Schroeder says.
* A total of 119 pens, or 59%, would have brought an average of about $25/head more if sold on a dressed basis compared with live.
* If sold on Grid 1, 61 pens or 30%, would have brought about $15/head more than if sold dressed and on Grid 2; 17 pens, or 8.4%, would have brought about $4 more. No pens received highest returns in Grids 3 and 4.
"If I had chosen to sell to a packer simply because I was accustomed to them or because I liked their buyer, and they were using Grids 3 and 4, it would have cost me money," Schroeder says.
What Are The Lessons? Looking at these results, Schroeder says these are the lessons to be learned:
* "You leave premiums on the table when you sell on a cash basis, whether live or a dressed basis," he says. "Not all cattle are going to perform better under a grid, but it's the only way to get a premium if they do perform better."
* If you retain ownership, match cattle to a grid.
"The base price is important," Schroeder points out. "It's often a formula price and you have to understand the base price as well as discounts and premiums."
* Cattle must be managed well. "The better you sort, the better decisions you make and the more money there is in it for you," Schroeder says.
Schroeder believes these new programs offer opportunities for producers. "But it takes scrutiny by you to ultimately get the premiums you deserve," he says. "In the long run it will help you in honing management to produce the kind of cattle the consumer wants."
Carcass Data Is A Must Getting detailed kill sheet data from the packer - including individual quality and yield grades and carcass weights - are important, but sometimes tough to get.
"Packers typically don't have individual animal live weights, only total pen weights with dressing percentages usually only available for the pen as a whole," Kansas State University economist Ted Schroeder says. "So for maximum value, each animal needs to be identified so the kill sheet data can be correlated back to dam and sire."
Kill sheet data is useful for these reasons:
* It helps target calves that fit specific packer or alliance grids. "Without this data, selling on a grid is very risky because discounts are severe for cattle not desired for a grid," he warns.
* It conveys information to calf buyers regarding packing performance of calves when finished. Otherwise, buyers must rely on visual appraisal, a poor predictor of ultimate fed-cattle value, warns Schroeder.
* It's valuable to use in conjunction with production data to make breeding and culling decisions to improve the herd.
"Finished cattle are affected not only by genetics and other production factors, but also growing and feeding management," he warns. "Culling based on finish quality alone will probably not signal the most profitable culling procedure, but it's one more piece of relevant information to have when making culling choices."
Those producers who learn the benefits of acquiring kill sheet information to make production and marketing decisions will produce quality cattle that bring prices exceeding commodity market values, says Schroeder.